CFO Intelligence Magazine – Winter 2024
Tani Fukui
Macroeconomist, Director,
MetLife Investment Management
At a conference a short while ago, I was explaining why the scariest item in my slide deck was a chart about the Fed’s rate hikes. I even had a great analogy to liven things up: I linked it to Top Gun: Maverick, and how Tom Cruise pushed an F-18 so hard that it became structurally unsound. It was great
But then one of the executives commented that my graphic on labor productivity was, for him, the scariest chart. It looked something like the labor productivity chart to the right: Real Output Per Hour Worked in the U.S. He was worried about whether the recent decline in productivity meant that businesses were overdoing their hiring binge, and whether that meant an imminent reversal. He has a point.
THE PANDEMIC PRODUCTIVITY BUMP
During the pandemic, there was an initial bump up in productivity: Businesses operated with a skeleton crew of only a few socially distanced workers at the same time as people started buying all the goods needed to wait out a pandemic. I remember going to the store and only one guy was working there, handling a long line of masked customers snaking out the door.
No matter how slow that cashier was, he was incredibly productive, since the entire output of that store accrued to him.
After a while, companies started to rehire their workers and add new ones to catch up to the big increase in output — this caused productivity to decelerate and eventually decline in 2021 and 2022.
Some of this reversal was inevitable, given the pandemic’s path. But in recent quarters, this decline in productivity has is increasing more rapidly than the output, then as long as wages aren’t spiraling downward (hint: they’re not), profit margins get squeezed. There have certainly been occasions when large declines in productivity do not lead to recession the early 1990s comes to mind and it is naturally possible that smart, long-term hiring plans could be temporarily negative but pay off in the longer run. But it assumes both the ability to withstand weak profit growth in the near term and a relatively rapid recovery in demand.
There is obviously considerable variation among sectors. The sectors that are still hiring leisure, hospitality, health care — are still recovering and may still be above their long-run productivity trend. But that just implies that other sectors are facing an even grimmer productivity situation. It remains a macroeconomic concern.